As previously covered in this publication and elsewhere, sweeping legislative reforms under the 2019 Housing Stability and Tenant Protection Act (HSTPA) intended to protect rental tenants perhaps inadvertently—and, many argue, deleteriously—included cooperatives in their regulations. Among those regulations is the prohibition of collecting “additional rent” charges—such as late fees, attorney fees, sublet fees, and the like—in summary nonpayment proceedings in Housing Court.
Because the structure of cooperative ownership relies on a proprietary lease for the right to occupy a unit within the building, legislation that covers residential leasehold agreements is inclusive of co-ops and their shareholders. In cases where a shareholder is being legally pursued for nonpayment of “rent”—or, in co-op parlance, the monthly charges referred to as “maintenance”—there’s a strong likelihood that in addition to maintenance, the shareholder owes other monies to the co-op for late fees, assessments, repair fees, and attorney fees that accrue in the course of the proceedings or any other legal action that has been taken against them.
Unlike rental apartments where unpaid and unrecovered charges from a tenant would fall to the landlord, in a co-op the remaining shareholders are on the hook for any bad debts. It is therefore incumbent upon boards to avoid shouldering their neighbors with undue financial burdens in ways that are legally permissible.
The Case for Nonjudicial Foreclosure
One possibility suggested for recovering fees from a shareholder in arrears now that HSTPA prevents “additional rent” collection is commencing what is known as a Uniform Commercial Code (UCC) Article 9 nonjudicial foreclosure. According to Marc Schneider, managing partner at law firm Schneider Buchel in Garden City, New York, this option is available because of co-op shareholders owning shares rather than real property (as is the case in ownership of a condo or single-family home).
A sale of shares via a nonjudicial foreclosure has the benefit of avoiding the courts and therefore the legal fees and protracted timeline associated with them. Once such a foreclosure is initiated, says Schneider, the shareholder’s only recourse is to file a lawsuit, which would of course require additional time and money on the part of the shareholder. Schneider asserts that the threat of losing the shares in the foreclosure sale is enough to force the shareholder to make the co-op whole or to strike a deal that suits both parties.